Fed stance not as dovish as it seems

March 25, 2019 11:58
Fed Chairman Jerome Powell has abandoned projections for further rate hikes this year amid signs of slowing economic growth. Photo: Reuters

The United States' Federal Reserve has said it will ease the reduction of its balance sheet – lowering the monthly cap to US$15 billion in May from US$30 billion at present – and halt the drawdown altogether at the end of September.

Despite this, its stance is not as dovish as widely thought if we consider its plan on private sector debt.

The central bank will continue allowing the mortgage and agency bonds it bought as part of the quantitative easing program to roll off. That means the Fed would keep shedding corporate bonds and mortgage-backed securities at the current maximum of US$20 billion a month from October, which will be reinvested in Treasuries.

Any principal payments in excess of that monthly cap will continue to be reinvested in agency MBS.

Imagine how that might put upward pressure on corporate financing costs.

Companies shouldering excessive debt will face higher risks, and this situation could bring additional volatility to the equity market.

The full article appeared in the Hong Kong Economic Journal on March 22

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal